From coast to coast, both state and local tax authorities are rapidly responding to the Coronavirus (COVID-19). And while many of the relief efforts are appropriately aimed at supporting individuals who have been impacted by COVID-19, recent pronouncements from local leaders demonstrate that cities are also eager to implement measures supporting small businesses within their communities.
On January 21, A. 9112 was introduced in the New York Assembly. An identical Senate companion bill, S. 6102, has been referred to the Senate Budget & Revenues Committee after being introduced in May 2019. The bills would impose an additional 5% tax on the gross income of “every corporation which derives income from the data individuals of this state share with such corporations.” The bills do not provide further detail or limitation on the scope of the proposed new imposition language.
The bills would also establish a six-member Data Fund Board, to invest the tax revenue collected and distribute net earnings “to each taxpayer of the state” in a manner determined by the Board. If enacted without amendment, the bills would take effect 180 days after being signed into law.
As written, the proposed New York tax would unconstitutionally apply to all income worldwide earned by a company deriving income from data from New Yorkers. A state tax on a multistate business must “be fairly apportioned to reflect the business conducted in the State.”
The tax as written is so broad it would apply to essentially every business. Every business collects data and uses it to market or complete a sale, and any corporation with data-derived income from New York customers would be subject to the new tax on their total revenue. “Data” is a broad term. If a company collects zip codes or phone numbers at checkout, asks for email address to join a mailing list, counts customers coming in or out of the store, collects website click or open data, or asks for information from customers, such as their size or shipping address, before making a sale, it apparently would be subject to this tax. For many such businesses, a gross receipts tax at a 5% rate would wipe out all profits, equivalent to an over 100% corporate income tax. At that point, a tax for engaging in data collection might become so punitive it violates the Due Process Clause. Another obvious due process problem is that the lack of definitions and the broad sweep of this proposal could invalidate it on void for vagueness grounds.
Any meaningful attempts to address these constitutional issues, such as by specifically applying the tax only on big tech companies, would add new problems under the Permanent Internet Tax Freedom Act (PITFA). A tax on digital use of data while the non-digital use of data is not similarly taxed would run afoul of PITFA’s ban on tax discrimination against electronic commerce.
First Maryland, then Nebraska, now New York. The repeated introduction of targeted taxes on digital companies early in 2020 seems to be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on.
“Generally, the only places with gross receipts taxes today are U.S. states and developing countries.” –Professor Richard Pomp, University of Connecticut
As the economy shifts to a digital one, we are finding that states are turning toward unconventional revenue options. One trend we’re seeing is the surprising comeback of the gross receipts tax (GRT):
- Oregon’s new Commercial Activity Tax (CAT) takes effect January 1, 2020. Oregon officials are currently writing rules to implement it. Portland, Oregon also adopted a 1% gross receipts tax, imposed only on big businesses, starting January 1, 2019.
- San Francisco voters imposed an additional gross receipts tax on businesses with receipts of more than $50 million beginning January 1, 2019. This is on top of the gross receipts tax that was phased in from 2014 to 2018 to replace the city’s payroll tax.
- Nevada’s Commerce Tax took effect July 1, 2015, imposing differing tax rates on 26 categories of business with over $4 million in receipts. Part of the revenue was to reduce the state’s MBT payroll tax, but legislators suspended those reductions this year; it’s now in court.
- Serious proposals to adopt a statewide gross receipts tax keep coming, with the last three years including Louisiana, Missouri, Oklahoma, West Virginia and Wyoming. A San Jose, California gross receipts tax proposal was approved to gather petition signatures in 2016 but eventually morphed into a business license tax overhaul.
Judicial deference to state tax agencies puts taxpayers at a steep disadvantage and wastes time and resources on costly tax disputes. A united advocacy effort can help promote passage of state-level legislation that takes the tax administrator’s thumb off the scales of justice in administrative and judicial review of tax determinations.
The District of Columbia (DC) Office of Tax & Revenue (OTR) implemented sweeping changes to the Qualified High Technology Company (QHTC) certification process this year. As you may remember, beginning last year, OTR implemented a new online QHTC self-certification process for companies to obtain exempt purchase certificates. This year, OTR is expanding the scope of this online self-certification requirement to all QHTC benefits—including exempt sales as a QHTC and other non-sales tax benefits available to a QHTC (summarized here). This change was accomplished through amendments to the QHTC certification regulation (DC Mun. Regs. tit. 9, § 1101) that were proposed by OTR in November 2018 and became final on January 4, 2019. The changes apply to all tax returns due on or after January 1, 2019.
So What Changed?
Historically, the relevant OTR regulation provided that to claim a credit or other benefit, a QHTC was required to attach a form prescribed by OTR (i.e., Form QHTC-CERT) to each applicable tax return or claim for refund. See DC Mun. Regs. tit. 9, § 1101 (prior to Jan. 4, 2019). Effective January 4, 2019 with the finalization of the amended regulation, this procedure now requires every QHTC to submit a Self-Certification request online via MyTax.DC.gov on an annual basis and obtain a “certificate of benefits” letter from OTR each year. No tax exemptions or benefits will be allowed without a valid certificate of benefits letter that is obtained prior to or concurrently with the filing of a return on which the benefits are claimed. Thus, to claim QHTC benefits on a monthly sales tax return for January 2019, the certificate of benefits will need to be requested from OTR for review/processing prior to the upcoming mid-February return deadline. Unlike the procedure in the past, the certificate of benefits letter obtained online will be deemed to attach to any tax return due and filed during the period for which the certificate is valid and unexpired. The certificate of benefits is expected to be valid for one (1) calendar year from the date it is issued/approved by OTR. Unlike prior years, the new regulation requires all benefits applications filed by a QHTC to include all of the following information:
- Taxpayer ID Number
- Sales Tax Account Number
- NAICS Code
- Information demonstrating QHTC eligibility (including attaching proof of DC office location, such as a current lease agreement)
- First year certified as QHTC
- Explanation of principal business activity
- Amount of QHTC Exempt Sales/Purchases from the prior year (broken down by period)
- Number of QHTC employees hired
- Number of QHTC employees hired who are District residents
- Schedules detailing QHTC employee credits
- Number of QHTC jobs created in the past year
- Gross revenue
- Gross revenue earned from QHTC activities in the District
Practice Note: Companies that have historically claimed one or more of the tax benefits available to QHTCs and wish to continue to do so in 2019 need to carefully review [...]
On November 14, the second day of its 2018 veto session, the Illinois Senate voted unanimously to override Governor Rauner’s amendatory veto of Senate Bill 1737 (Bill). As we have previously reported, the Bill is a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance. The Illinois General Assembly passed the Bill on May 31, 2018, with bi-partisan support. The Illinois Department of Insurance, key industry groups and several large Illinois-based taxpayers also support the legislation.
If it becomes law, the Bill would create a much more favorable regulatory framework for Illinois captives, following the lead of multiple jurisdictions, including Vermont, Hawaii, South Carolina and the District of Columbia. (more…)
Illinois Department of Revenue Issues Post-Wayfair Guidance Implementing October 1 Economic Nexus Law
In June 2018, just before the US Supreme Court ruling in Wayfair, Illinois enacted an economic nexus standard modeled after South Dakota’s law (see our prior coverage). The new Illinois standard takes effect on October 1, 2018. On September 11, the Illinois Department of Revenue (Department) issued an emergency rule (Regulation 150.803), together with other guidance found on its website, intended to assist remote retailers with compliance with the new law.
The Regulation was effective immediately. Retailers should note the following key features of the Regulation. (more…)
Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services
On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.
City’s Amusement Tax and Amusement Tax Ruling #5
The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.
The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here. (more…)
Top Hits You May Have Missed
Looking Forward to June
June 1, 2018: Stephen Kranz presented “Diverse Routes to Resolving SALT Audit Issues” at the Georgetown Law Advanced State and Local Tax Institute in Washington, DC. Stephen discussed numerous complex audit issues facing tax administrators and taxpayers alike, including avenues for equitable resolution of complex audit issues and evaluation of when litigation is the best means of resolution.
June 5, 2018: Alysse McLoughlin is presenting “Partnership Audit Regulations: The Great Unknown” at the Federation of Tax Administrators Annual Meeting in Nashville, TN.
June 21, 2018: Britt Haxton, Kristen Hazel, Enrica Ma, Jane May, Sandra McGill, Alysse McLoughlin, Maureen O’Brien and Diann Smith are presenting at Tax in the City® New York about the various impacts of tax reform on state and local taxes, digital commerce, cross-border transactions, and compensation structures and fringe benefits. There will also be a CLE/CPE session on the ethical considerations around tax reform. Email Maria Dubinets at firstname.lastname@example.org to register.
June 25, 2018: Alysse McLoughlin is presenting “State Implications of the Federal Partnership Rules” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.
June 26, 2018: Stephen Kranz is presenting “Taxability of Digital Goods and Services” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC. Stephen will present an overview of US digital taxation, the characterization of tangible personal property, related legislative and administrative developments, and an update on recent litigation in digital tax. He will also provide an overview of best practices, including minimizing sales and use tax on software related transactions as well as audit tips.
June 27, 2018: Jane May is presenting “State Payroll Audits” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.
June 28, 2018: Stephen Kranz is speaking at the National Conference of State Legislatures (NCSL) Executive Committee Task Force on State and Local Taxation, Lake Tahoe NV, regarding federal tax reform and next steps on the remote sales tax. He will also present an overview of the South Dakota v. Wayfair Supreme Court oral arguments and upcoming decision.
Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).
HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota. (more…)